United Kingdom | Publication | Q2 2024
Almost four years after it came into existence, the UK restructuring plan has been considered by the English Court of Appeal for the first time. On 23 January 2024, the Court of Appeal handed down judgment in relation to the Adler group plan and seized the opportunity to provide guidance on a wide range of issues. The judgment is already shaping the restructuring landscape, with two further large-scale restructuring plans receiving sanction in the weeks that followed: first in relation to the McDermott group, and second in relation to the Aggregate group. This article considers the practical takeaways and reflects on what the future might hold for UK restructuring plans.
In the first appeal of a restructuring plan, the Court of Appeal unanimously overturned the High Court’s decision to sanction the Adler Group’s (Adler) restructuring plan (the Adler Plan). In doing so, the Court clarified how judges will exercise their discretion when asked to impose the cross class cram down (CCCD) mechanism on a dissenting class of creditors.
A somewhat unusual (if not novel) feature of the Adler Plan was that the objective was not to achieve a rescue, but rather a controlled wind-down that would provide a better realisation of the group’s assets than would be achievable in an immediate formal insolvency process. Prior to the Adler Plan, Adler’s Luxembourg incorporated issuer had €3.2 billion of face value debt constituted by six series of senior unsecured notes (the Notes). The Notes had staggered maturities between 2024 and 2029, but in any insolvency proceedings, would rank pari passu (that is, all note holders would receive a rateable share of the funds available to pay down the noteholders).
The Adler Plan proposed to retain the staggered maturity dates, save that the holders of 2024 notes would accept second-ranking security in return for a one-year extension to their maturity date. New money would be provided by willing noteholders, who would receive first-ranking security. The five other series of Notes would also benefit from the grant of new security which would rank equally as between themselves.
To bring the restructuring within the English court’s jurisdiction, an English newco was incorporated as substitute issuer for the Luxembourg parent.
The Adler Plan proposed six classes of creditors – one for each series of Notes. All but one class voted in favour of the plan with the requisite 75% in value majority. The holders of the notes due to expire in 2029 (the 2029 Noteholders) rejected the plan, principally on the basis that in the ‘relevant alternative’ to the plan (in this case, liquidation) they would be treated pari passu with the other noteholders, whereas under the Adler Plan they would be paid last and therefore bear the greatest risk of the plan failing.
The High Court sanctioned the Adler Plan and agreed to order CCCD in respect of the 2029 Noteholders. The 2029 Noteholders appealed.
The Court of Appeal held that by retaining the staggered maturity dates, the Adler Plan departed in a material respect from the pari passu principle, without justification. The Court clarified that in relation to plans where the court is asked to apply CCCD on a dissenting class, it is inadequate to apply the usual rationality test applied in schemes of arrangement (which looks at whether the plan is one that an intelligent and honest person of the class concerned might reasonably approve) when the court exercises its discretion. Instead, the court should apply the “horizontal comparator” test and compare the rights of the dissenting creditor class with other classes, considering whether the distribution of the benefits of the plan is fair and whether any differences in treatment are justified. The court may also ask itself whether a fairer or improved plan might have been available having regard to the position of the dissenting class. This represents a sea change as it had previously been understood that, when faced with CCCD, courts could only consider the plan on the table, as is the case with Part 26 schemes of arrangement and part 26A restructuring plans that do not rely on CCCD.
Crucially, the Court of Appeal was unconvinced that the Adler Plan would result in payment in full for the 2029 Noteholders. The property valuations relied on a small margin for error, were inherently speculative, and highly dependent on prevailing market conditions. While the 2029 Noteholders had commercially accepted a later maturity when they purchased the notes (which later maturity was reflected in the reduced price of the notes when compared to earlier dated notes), in the event of liquidation, the notes would be treated pari passu with all other notes. In the Court of Appeal’s view, it was this ‘relevant alternative’ against which the Adler Plan should be tested. Under the Adler Plan, the 2029 Noteholders would lose their pari passu status without justification, when a fairer plan could have been proposed to align the maturity dates of the notes.
The Court of Appeal went on to remark that retention of equity by shareholders did not depart from the pari passu principle in this case, because the shareholders would receive nothing until the creditors had been paid in full. The “provisional” view of the Court was that it does not have the power to sanction a cancellation or transfer of shares, nor a complete compromise of debts of out-of-the-money creditors, for no consideration. Like Part 26 schemes of arrangement, Part 26A plans require an element of “give and take” and even out-of-the-money parties should receive something.
It remains unclear what practical impact the English Court of Appeal’s decision will have on Adler. The English judgment provides that, at least as far as English law is concerned, the alterations to the notes effected by the plan are ineffective, and the parties would have to consider their respective positions in the light of the judgment. Notwithstanding this position, Adler has publicly stated that, in its view, the Court of Appeal’s decision to set aside the Plan has “no effect on the previously implemented financial restructuring” as it contends the amendments to the Notes are effective as a matter of German law. It remains to be seen whether further cross-border litigation will resolve the matter.
Hot on the heels of the Adler judgment, the High Court sanctioned the McDermott group’s UK restructuring plan (the McDermott Plan). The case illustrates how restructuring plans should be regarded as a piece of potential complex litigation from the beginning. The McDermott Plan involved inter-dependent parallel proceedings with two other group companies proposing Dutch WHOAs. The UK aspect involved successful applications for an extended timetable culminating in a six-day trial and ‘without prejudice’ negotiations taking place while the trial was conducted.
The UK plan company, CB&I UK Ltd, is one of more than 300 companies in the global McDermott group, which operates in the engineering, procurement, and construction sectors. The ultimate parent company is McDermott International Ltd (MIL) and as part of a 2020 US Chapter 11 process, equity had been transferred to financial creditors. The McDermott Plan proposed no new money and no amendments to its existing letters of credit facilities. Rather, it proposed (amongst other matters) to extend secured debt maturity dates, leave equity whole, and extinguish the claims of two large unsecured litigation creditors (the dispute proceeding creditors). One such creditor, Refinería de Cartagena S.A.S. (Reficar), opposed the plan at the sanction hearing.
Reficar, a Columbian state-owned company, was owed approximately US $1.3 billion under an arbitration award. The plan as originally proposed was to compromise the ‘dispute proceeding creditors’ (including Reficar) in exchange for the greater of a variable contingent cash payment based on the group’s EBITDA and a pro rate share of the ‘prescribed part’. This is a pot of money set aside from floating charge realisations for the benefit of unsecured creditors in an English liquidation. This could have amounted to Reficar receiving a maximum of approximately 0.2% of the value of its arbitration award. Two out of seven classes rejected the McDermott Plan. The High Court was asked to apply CCCD and sanction the plan regardless.
Following the Court of Appeal’s decision in Adler, the High Court needed to determine whether the payment to Reficar amounted to a ‘compromise or arrangement’ rather than a mere extinguishment of rights, particularly given that the original proposal was to keep equity whole.
One of the interesting aspects of the McDermott plan was the impact of the parallel WHOA proceedings in the Netherlands. Interdependent schemes are not uncommon where recognition is required in multiple jurisdictions, as occurred in the recent restructuring of the Vroon shipping group. In the case of McDermott, the Dutch restructuring expert appointed by the Dutch court recommended a proposal that would allow Reficar to acquire up to 19.9% of the ordinary shares in MIL, the parent company. During the course of the English hearing, the same offer was extended to Reficar under the UK McDermott Plan. If Reficar rejected the offer, it would still be guaranteed 10.9% of MIL’s equity, assuming the WHOAs were sanctioned. As the English judge commented, the offer ‘was essentially what Reficar had been asking and negotiating for’, although by the time of the English Court’s judgment, Reficar had not accepted the offer. Despite the judge’s earlier sympathies with Reficar’s position, he considered its failure to accept the offer in respect of its unsecured claim when it was clearly ‘out of the money’ curious. In the judge’s view, that failure demonstrated that the ‘relevant alternative’ to the McDermott plan was not likely to be an alternative negotiated settlement, as Reficar had argued.
Having exercised the Court’s discretion to sanction the McDermott Plan in the light of the revised offer, the judge went on to comment that the original offer, representing more than Reficar would have received in the ‘relevant alternative’ of liquidation through its share of the prescribed part, but still a fraction of the face value of its claim, would have been sufficient to amount to a ‘compromise or arrangement’. While the Court of Appeal in Adler left unresolved the question of how much consideration is adequate for a plan to constitute a compromise, the High Court in McDermott appears to suggest that the answer is merely something more than the creditor would receive in the relevant alternative.
Shortly after the High Court sanctioned the McDermott Plan, it sanctioned a further, revised plan (the Aggregate Plan) in respect of a member of Project Lietzenburger Straße Holdco S.À.R.L., a Luxembourg-incorporated company within the Aggregate group whose key asset was a large, uncompleted development project site in Berlin. The plan company was guarantor of secured debt having entered into a Deed of Contribution to assume the obligations of the principal group debtors. It was accepted that, given the risk of contribution claims, it was possible for the plan to compromise claims against the plan company and the group’s principal debtors.
In order to engage the English court’s jurisdiction, the plan company shifted its COMI to England.
The Aggregate Plan proposed three classes of creditors in respect of the senior debt, the subordinated ‘Tier 2 Debt’, and the junior debt. The Tier 2 Debt and junior debt was to be released in full, with the senior creditors having their maturity dates extended and the option to participate in new, super senior money in return for elevated priority for a portion of their existing claims. The Aggregate Plan was rejected by the junior creditor class and although the Tier 2 Debt class voted in favour, the low turnout in that class (representing 10.67%) meant that the class was assumed to have dissented.
In the meantime, the Court of Appeal delivered judgment in Adler, prompting the plan company to propose an amendment to the Aggregate Plan. The Court of Appeal’s confirmation that a plan must represent a compromise or arrangement resulted in the plan company offering €150,000 in respect of the Tier 2 Debt and €50,000 in respect of the junior debt. The value of the Tier 2 Debt was €150 million, while the value of the junior debt was €95 million.
At the sanction hearing, the judge accepted that the dissenting creditors were out of the money and that the relevant alternative was liquidation. However, in light of the Adler judgment, the original Aggregate Plan that the classes had voted on did not represent a compromise in respect of the dissenting creditors. Reasoning that the court had no power to sanction a plan that did not represent such a compromise or arrangement - and that it had no power to approve an amendment to a plan in respect of which it had no power to sanction - the High Court ordered a further meeting of the senior creditors to vote on the revised plan on three business days’ notice. In doing so, the judge agreed to exclude the dissenting creditors from a further vote on the basis that they were out of the money. Having already indicated that the Court considered the revised plan to be a fair one, the judge sanctioned the revised Aggregate Plan at a further sanction hearing three days later.
In light of these decisions, what does the future hold for UK restructuring plans? Evidently the procedure continues to be a successful tool for restructuring companies, including foreign companies. However, the cases demonstrate that, as flexible as the restructuring plan may be, it does not give debtor companies carte blanche to extinguish creditors’ rights. The following points should be considered in relation to future plans:
Following the Court of Appeal’s decision in Adler, plan companies must have regard to the pari passu principle when negotiating a restructuring plan and seeking to implement a CCCD. A departure from this principle is permissible only where there are good reasons. This might include the case of key suppliers or employees, or creditors who are supporting the restructuring by providing new money. Whether a departure can be justified will be fact-sensitive and the parameters of this test will be developed by future cases.
It has long been established that the sanction hearing in schemes and restructuring plans is not a rubber-stamping exercise. However, Adler confirms that where a plan involves CCCD, the court will exercise its discretion robustly and carefully. Satisfying the statutory conditions for CCCD merely opens the gateway to possible sanction, and the “fair wind” that blows with schemes of arrangement that have the benefit of a strong majority approval does not blow with a restructuring plan seeking to implement a CCCD. When exercising its discretion, the overall levels of support from assenting classes is irrelevant to assessing whether the plan is fair in respect of the dissenting class(es).
It is now clear that a plan must offer a genuine compromise or arrangement and not merely an extinguishment of rights. This applies to shareholders as well as ‘out of the money’ creditors. The Court of Appeal in Adler suggested that the amount of such a payment need only be modest. It appears from the High Court’s decision in McDermott that something more than the party would receive in the relevant alternative will suffice. As a result, establishing the true ‘relevant alternative’ to demonstrate what the creditor would receive should the plan fail is likely to be a key battleground in future cases. In light of the decision to exclude the subordinated creditors from voting on the amended Aggregate Plan, we may see more applications by plan companies to exclude out of the money creditors from voting.
In Adler, the Court of Appeal considered the elevation of creditors’ existing claims in return for providing new money (rather than simply granting senior priority in respect of the new money). While this may be permissible, the Court was sceptical as to whether enhanced priority could be granted to existing debts where the opportunity to provide new money is not offered to all creditors or where the money is provided on more expensive terms than would be available in the market. The Court also suggested that any elevation in priority would need to be proportionate to the benefits provided by the new money. In both the Adler Plan and the Aggregate Plan, elevation was considered permissible.
In Adler, the Court of Appeal fired a shot across the bow of any company looking to achieve a court-sanctioned restructuring in an artificially condensed timeframe. The Court confirmed that it will not sacrifice fundamental principles of procedural fairness between the parties, nor will it be railroaded into a decision when the circumstances giving rise to the urgency are entirely foreseeable (such as a looming maturity date). Any company that does not propose a realistic timetable will risk hearing dates being adjourned. Indeed, the McDermott trial was listed for a later date and extended in duration in the interests of procedural fairness.
Given the difficulties of unwinding a plan that is implemented shortly following sanction, the Court of Appeal in Adler suggested that in future cases parties wishing to appeal the sanction decision should seek a stay or a delay in the plan becoming effective. It will be interesting to observe the circumstances in which the courts may be prepared to grant such stays in the future, whether they become common practice and, if so, how this will impact on the perceived utility of restructuring plans.
While a UK restructuring plan is likely to be less expensive than a US Chapter 11 process, the costs are often relatively high. The professional fees in McDermott amounted to approximately US $150 million. It seems likely that restructuring plans in the mid-market will remain less common. Where a plan is opposed, challenges in relation to valuation evidence and the ‘relevant alternative’ will inevitably increase costs. The successful appeal in Adler is also likely to encourage future appellants, increasing the risk and cost of plans for the proposing company. For SME and mid-market businesses, other solutions such as a pre-pack administration may be more cost-effective.
The Court of Appeal in Adler made clear that the judgment should not be taken as an endorsement for future cases of the technique of substituting an obligor or creating an English co-obligor of debt owed by a foreign entity to bring a plan within the English court’s jurisdiction. This may provide a potential ground for challenge in future cases.
Ultimately uncertainties remain for creditors who are out of the money, particularly those with claims against a company that had no previous connection with England and Wales at the time of entering into the contractual relationship, but which subsequently engaged the English court’s jurisdiction, for example by way of change of governing law in the underlying contract, COMI shift, or establishing an English newco to act as assignee of the debt.
1 Re AGPS Bondco Plc [2024] EWCA Civ 24
2 Re CB&I UK Ltd [2024] EWHC 398 (Ch)
3 Re Project Lietzenburger Straße Holdco S.À.R.L.[2024] EWHC 468 (Ch); [2024] EWHC 563 (Ch)
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